Salocin

Competition is bad...

In my usual, semi-random, pick-a-topic-and-go-with-it style, I've stumbled across an article that caused my vitriol to start flowing, and am going to run with it for a few moments in public. My audience of 17 automated search engines, 3 loyal readers and numerous random accidental-droppers-by will no doubt treat this with the disdain it deserves, because it is no doubt interesting only to me.

In a recent article on c|net, I learned that the US Supreme Court recently ruled on the issue of sharing telecom network cabling. You must be thinking, 'Oh My God, How Incredibly Boring' by now.

Well - perhaps - to someone who leaves it there. As with most things, you have to dig a little deeper to understand why the ramifications are so significant, and if you give me a few moments of your time, I'll do my best to illustrate, since - after all - it happens to be the industry I am currently working in (albeit not in the U.S.).

The issue at stake was whether the incumbent cable companies should be forced to share their infrastructure with competing cable companies.

I'm sure the visceral reaction to that statement is simple : of course they shouldn't, it's their cabling, why on earth should they be forced to share?

A little thought goes into the economics of the situation, however, and the answer is - 'yes, they should, it's the only way to develop the market'. An option now scuppered by this decision.

The issue at stake is whether home users get access to faster broadband. The example to follow is that of Japan, where for $22 per month, in urban areas, you can now get 40 megabits-per-second speeds at home. The 'Basic Broadband' offered in the U.S. at the moment is 1.5 megabits-per-second, and that costs you around $40 per month.

How did Japan get to where it is? It forced competition into the market by compelling operators to allow access at competitive prices to all their physical fibre. It then incentivised the laying of fibre across the whole country through tax breaks and other financial means. In no time the speeds started spiralling upwards as each new entrant into the broadband market sought to outdo their competitors.

Right now, in the U.S, the owners of the pathetic bandwidth into each home are the telephone companies and the Cable TV companies. The telephone companies have no incentive to hit speeds of 2mb and over because that enables IP Voice and they'll lose all their lucrative telephone revenue, and the Cable companies have no incentive to go any higher than 4mb because that might allow people to download movies and the like (legally, I should add). It's little wonder they're lobbying like crazy to protect their right to keep America in the dark ages when it comes to internet connectivity.

Meanwhile in Japan, you can stream HDTV quality content over the internet while simultaneously having a video-conference, surfing the internet, making 3 phone calls, checking your bank balance and surfing illicit high-resolution images.

Economically, there's little incentive to lay cable covering each household if you're only going to get one-in-fifty to subscribe, and even that will take you 3 months. The capital expenditure (which is in the high millions) will simply not be justified. What you need is an incremental model where you can start selling broadband off the back of the current network, and gradually build on that network through the installation of additional bandwidth and equipment at the local exchanges.

Unfortunately, the U.S. is governed by the lobbyists, and the cable TV and telephone companies can afford a lot of those, while entrepreneurial startups cannot.

What is really sad is that the U.S. is supposed to be the nation where entrepreneurship is most encouraged, but as my MBA teachers pointed out, the source of the encouragement is that it's OK to fail, which means it's OK to try. The fact that legislation protects incumbent monopolists and therefore destroys in sectors such as telecommunications is glossed over - the entrants will fail, but that's OK, it's America. The fact that they failed because of government legislation making the playing field uneven is - once again - glossed over.

What Americans really want, from the consumer point of view, is 40-meg broadband for $22, but you have to go to Japan to get that, and as a recent article in Foreign Affairs put it, America is too far behind to ever catch up, and Japan will get the first chance at developing the kinds of applications that can take advantage of such high speeds.

But what can you do with 40meg? I hear you ask. Well, they said the same when 1.5 meg superceded the 56k dialup connection, and the truth is, once you've gone to broadband - even the slowest kind - it's almost impossible to go back.

If you think the problem's bad in fixed-line broadband, just wonder how bad it is in wireless, where Japan is ever further ahead. The U.S. is lagging sadly behind with the recent introduction of m-mode - a copy of the Japanese i-mode, more than a few years after Japan introduced it and then moved on from it.

All in all, if America loses it's competitive edge in the next decade, it will do so through an obsessive but misplaced desire to protect incumbents, not only in industry, but also in government. Lobbyists are useful, but given too much power, they are poison, and America is suffering from it.

Posted by nlvp at June 30, 2005 12:00 AM